Imagine you’ve seen advertisement of new smartphone. The device has caught your eye with its advanced processor, camera and features, which are better than those on your current phone. Is it worth investing in the purchase? What benefits will you gain and what will happen if you change your mind and decide to keep using your old smartphone? It’s time to count the figurers and weigh everything up in your head.

And you need to consider not only the material benefits, but also the intangible ones – after all, all your friends have already switched to new smartphone model, and perhaps you don’t want to be left behind. And better-quality photos on social media won’t go amiss either.

We all unconsciously carry out a Cost-Benefit Analysis – a very popular method of analysing the costs and benefits used by the Project Managers. It is a data-driven decision-making method. We enter much of the information at the input, and at the output we get a simple cost-benefit ratio that allows us to answer the question: Is there a Business Case in our project? In this Article, we’ll explain why you need to learn about this tool and what methods of Cost-Benefit Analysis (CBA) exist.

What is Cost-Benefit Analysis and why you need to know it

The Project Management Body of Knowledge (PMBOK) defines cost-benefit analysis as “A financial analysis tool used to determine the benefits provided by a project compared to its costs”. Furthermore, it is recommended that CBA be carried out not only prior to project initiation, but also during the process to make various decisions when the alternative options exist.

There is no single template for conducting such an analysis, as the concept of ‘benefits’ may include not only the tangible benefits, such as profit, but also intangible or difficult-to-quantify benefits: ‘public good’, ‘years of life’, ‘health’.

Therefore, Harvard Business Schooladvises defining the success criteria before beginning the analysis, clearly understanding exactly what the project is trying to achieve – to generate profit, solve a social problem, improve the processes within the company and so on. The analysis will be impossible if you don’t measure all indicators in a single ‘common currency’. To do this, you need, for example, to translate ‘health’ into the financial metrics.

The benefits may include direct ones, such as profit and sales; indirect benefits (increased customer interest in your business); intangible benefits (increased employee motivation); and competitive benefits (being the first to enter new market). The cost category includes the direct costs, such as labour and production costs, indirect costs (rent, utility payments), intangible costs (decreased customer satisfaction, reduced productivity) and opportunity costs (which arise when business chooses one product or strategy over another).

The result is two figures: the total costs and the total benefits. These figures are compared: if the benefits exceed the costs, the initiative is considered justified.

The experts recommend using this tool for short- and medium-term projects. With the long-term projects, it is quite easy to make mistakes, for example, in forecasting inflation. With a CBA, it is quite easy to miss the important variables – not all events and influencing factors can be predicted.

Cost-benefit analysis is a key element of a Business Case. It serves as the economic justification of a project. The document outlines the goals, the necessary investment and the financial and qualitative criteria for success. The fate of the entire project depends on quality of the CBA, provided the sponsors give the ‘green light’.

What types of Cost-Benefit Analysis exist

French engineer Jules Dupuit invented this method in XIX century. He attempted to predict the ‘social profitability of a project, such as construction of a road or a bridge’. To do this, in his calculations, the specialist measured willingness of the potential users to pay for use of the bridge. Some users might be willing to pay almost nothing, others — much more, but the sum of these costs made it possible to understand the overall benefit. Calculating the project cost appeared to be simpler – simply adding up the materials, labour and subsequent maintenance. It was now possible to accurately analyse the costs and benefits of the project and make a justified decision.

The simplest analysis can be carried out using a small table with two columns for the costs and benefits. British organization Third Sector Dumfries and Galloway does not even take the financial indicators into account when making simple decisions (such as whether to launch new training for the employees on how to lift heavy objects without injuring their backs).

Costs	Benefits
Training materials are required	Reduction in the number of absences from work due to back pain
Staff costs whilst they are absent from their main place of work	No compensation payments for failure to provide mandatory training
Training and Retraining	No fines for breaching the health and safety legislation
Premises used for training	Positive company image and improved staff morale

However, here we are talking about internal training, which has virtually no affect on the interests of major external stakeholders. In turn, the US government uses CBA to make political decisions. For instance, in 2023, partially hydrogenated oils (PHO) — a source of transfats — were banned there. To make this decision, the FDA conducted an economic analysis: they compared the cost of completely removing PHO from the products (costs of changing the recipes, packaging, staff training, etc.) with the benefits this would bring (primarily, less heart attacks and deaths, and, consequently, — savings on healthcare).

They also took into account all key cost sources: reformulation of 26,000 products, ingredient substitution, packaging redesign, reduced shelf life, recipe adaptation in the restaurants and even time the households would spend getting used to new products (one and a half hours per household for retraining). All this was quantified in monetary terms and the net present value (NPV) over a 20-year period was calculated. It was estimated that the decision would yield $140 billion of the benefits and $6 billion of the costs. This results in the net benefits of $134 billion. Such a complex analysis was carried out largely because the decision affects a large part of the population and the interests of big business.

Cost-Benefit Analysis helps the Project Manager to make informed decisions, especially when the resources are scarce and the risks are high. It is not just a calculation, but a way of seeing the overall picture, from the material costs to impact on the staff and customers.

You don’t need to be an economist to use CBA. It is enough to ask the right questions, calculate transparently and make the decisions that are truly beneficial — not only for business, but also for people. In the next Article, we will explain how to conduct CBA independently.